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Greece: Driven into crisis

Workers in Greece protest government attacks on wages and benefits.

By Ingo Schmidt

April 27, 2010 -- The Bullet -- Neoliberal order reigns in the world. Stock markets are recovering
from the crash in the fall of 2008. Private banks are no longer weighed
down by bad loans that were added to public deficits. The latter were
rising anyway because the economic crisis had sent tax revenues on a
downward slide. Add further bailout money for financial companies and
fiscal stimulus and you get a veritable fiscal crisis of the state.

Meanwhile, rating agencies like Moody's and Standard and Poor's cast
judgement on the viability of fiscal deficits and public sector cuts, as
if their assessments of the financial sector had nothing to do with the "manias, panics and crashes" that pushed a cyclical recession near
depression in the first place. Public deficits between 12% and 13% of
GDP in Britain and the US are bad, they say, but not so bad that the
austerity measures they consider appropriate can't be left to Number 10
Downing Street and the White House.

In the European periphery, however,
things are, according to the master evaluators of the world, quite
different. Lumped together as PIGS, short for Portugal, Ireland, Greece
and Spain (or PIIGS, adding Italy), these countries are charged with
notorious wasteful spending and an inability to reign in deficits.
Therefore, deficits in these countries, while not exceeding the
British-US 12-13% range, are a threat to private investments in
government bonds and loans.

Structural adjustment for Greece

Consequently, investors have been taking Greece – supposedly the
worst of the bunch – to a financial market trial. Financial speculation
has driven interest rates on Greek government bonds beyond the pale and
social-democrat [PASOK] prime minister George Papandreou, who took over from his
conservative predecessor Kostas Karamanlis only in October 2009, into
the arms of the International Monetary Fund (IMF) and the European Union-dominating governments in Berlin and Paris. This unlikely coalition
promised Athens a deal that will offer urgently needed liquidity of up
to €45bn, at a slightly lower price than private markets would do. But
it will also put a political price tag on its interest rate discount.

The Greek government is expected to execute an IMF-style program of
so-called structural adjustments (on top of a whole series of radical
public sector cuts already taken). These programs, as is known from many
other IMF interventions since the dawn of neoliberalism in the early
1980s, include draconian cuts in public spending and the relaxation or
suspension of labour protective measures. Unlike other IMF packages, the
Greek one will not include enforced currency devaluation. After all,
Greece is a member of the euro-zone. It therefore has no currency to
devaluate. Yet, the EU commission and particularly the German government
made it very clear that they will insist on keeping the Greek financial
market open to international capital.

This is ironic inasmuch as the IMF, currently headed by Dominique
Strauss-Kahn who served as finance minister in Lionel Jospin's French Socialist
Party government from 1997 to 1999, recently relaxed its long-time opposition to capital controls. An IMF policy paper published in February
2010 declared that countries that have capital controls in place fared
much better during the financial crisis than countries that did not have
them.

Moreover, IMF chief economist Olivier Blanchard openly plays with
the idea of raising the inflation target for central banks to give them
more leeway for monetary policies and also to ease debt burdens at
least to some extent. Not surprisingly, the European Central Bank (ECB),
which has neoliberal monetarist principles enshrined in its statutes,
rejects this Keynesian brew served by French economists. Blanchard, it
should be noted, received the first years of his economics education in
France before he moved to the USA.

German chancellor Angela Merkel is
less concerned with the principles of economics but highly critical of
the French appetite for EU-level macroeconomic policies that could
counterbalance the ECB and its monetarist policies. Worse still,
France's current finance minister, the conservative Christine Lagarde,
recently complained about Germany's ongoing export offensive that
hampers domestic production and employment in deficit countries like
France, Greece and many others.

Pressure on Germany to reduce its current account surpluses is
growing and Merkel has been afraid that the role of German exports as a
key factor behind the Greek crisis might be debated in a EU-only rescue
package. Bringing the IMF in, even with its mild though still disturbing
deviations toward Keynesianism for Germany, became a means to stifle
any possible united front of EU countries against German exports.
Greece, other small EU countries, the EU Commission and the European
Parliament – the latter two meant to represent EU countries according to
their population size – do not play an independent role in the
political quarrels about Greece's escalating fiscal crisis. EU policy is
a matter of France and Germany, the UK if it shows an interest, and
the ECB; all other European actors are more or less pawns in the game.

This doesn't mean, however, that the governments in Berlin, London
and Paris are the kings and queens in the game: they are the rooks,
knights and bishops. Big money – still located in finance – is king.
Stock markets are the queen. The game they are currently playing has two
goals: making money from speculation against Greek government bonds and
securing previous investments by forcing whatever coalition of
EU governments and international organisations to funnel credit through
Greek coffers into their private hands. The game against Greece, likely
to be followed by similar ones against the remaining countries on the
PIGS list, takes advantage of macroeconomic imbalances within the EU and
a political design that helped to amplify these imbalances since the euro was introduced in 1999 and the last cyclical crisis hit Europe in
2001.

Germany and the euro

The major reason for these imbalances lies in the way West Germany
was integrated into the capitalist world economy after World War II.
Based on favourable exchange rates, access to US markets, an inflow of dollar investments and an effort to re-establish the deutsch mark as
the dominant regional currency, German industries successfully took an
export-oriented growth path on which they have stayed ever since. This
export orientation was sustained even further by a cross-class consensus
(notably with German trade unions and Social Democratic Party) on
monetary stability and wage bargaining meant not to disrupt German
competitiveness. This consensus was forged by hyperinflation and
currency reforms after Germany's two lost world wars and that helped to
keep inflation permanently below the level of other countries, even
during the inflationary climate of the 1970s. A structural competitive
edge formed that helped to keep German exports up and imports down.
After the Bretton Woods system of fixed exchange rates collapsed in
1973, Germany's trading partners, namely the European ones, repeatedly
devalued their currencies to regain some competitiveness.

Devaluations certainly don't help economically less advanced
economies to catch up to the advanced economies by improving their
technological capacities or addressing industrial policy, but they at
least provide some breathing space. This space was taken away with the
European Monetary Union (EMU) and the adoption of the euro. Unprotected
against German export industries, which combine economies of scale,
advanced technologies and comparatively low unit labour costs, the
weaker economies of the euro area saw a massive deterioration of their
current accounts since the introduction of the euro in 1999.

For a
number of years, increasing deficits in peripheral countries could be
financed by capital imports that also spurred middle-class consumption
and a boom in housing. The dependence on capital imports, though,
neither triggered domestic growth nor generate adequate tax revenue.
Even more than in the capitalist centres, the threat to turn the foreign
capital tap off was effectively used to avoid the slightest increase in
taxes by the national and international ruling classes. As a result,
current account and public deficits developed in tandem. This model of
peripheral accumulation completely collapsed when financial panic hit
Wall Street, the City of London and their outlets around the world in
2008.

The noose has further tightened around accumulation in the European
peripheries. Recovering from the crash and recession is the top priority
of monopoly and financial capital. Bailout money and fiscal stimulus
were the first measures toward profit restoration. While exit from
expansionary policies in the capitalist centres is still being
discussed, attempts to squeeze a few bucks out of peripheral countries
have already started. The fiscal crisis in Greece receives more
attention than any other since the world economic crisis began. It
should not be forgotten that the IMF delivered rescue packages to 20
countries, ranging from the neoliberal poster children Estonia and
Latvia, to bugbears like Serbia and Belarus, since the crisis first hit.
Notwithstanding some Keynesian gestures at the top of the IMF, these
packages are models of good old neoliberalism.

And why not? Driving countries into liquidity shortages, providing
urgently needed short-time credit and forcing them to permanently open
their markets to Western corporations, spurred world economic growth and
massively boosted private profits over the last three decades.

The neoliberal tricks, however, might not work this time. Economists
are already warning that the €45bn rescue package for Greece may be
insufficient to meet payments on all outstanding debt and that the
targets for spending cuts being demanded will, instead of guaranteeing
Greece's solvency, lead to further economic collapse in Greece.

Neoliberalism, financial bailouts and public sector austerity

In terms of the world economy, there is still considerable scepticism
whether the exits from fiscal stimulus and cheap money now being mooted
by the G20 group of leading capitalist states won't trigger another round
of crisis instead of paving the way to increased private spending.
Ironically, the Greek government and big capital are facing the same
problem: both depend on injections of public money. Big capital takes it
wherever it gets it, while Greece has to accept credit conditions
imposed by the IMF and a handful of other EU governments.

The economic problem is still the same: throwing uncovered public
cheques toward preserving over-accumulated private wealth. In order to
overcome the continuing world financial crisis, this over-accumulated
wealth needs to be written off. The dominant opinion in ruling financial
and industrial circles, however, has been to avoid the economic and
political fallout from a deepening of the crisis that such a write-off
would bring. At least so far. Instead, the strategy has been to blow up
public deficit bubbles like the economic authorities blew up internet,
housing and resource bubbles in the past. The difference is that the
private sector bubbles of the past that led to the financial crisis
could always rely on public sector bailouts. Now the bubble and the
bailout are both expected to come from the same public purse. The
neoliberal solution being called for by the German government, the Greek
government, the EU and the G20 is now to demand a "long war" on the
public sector.

Milton Friedman's verdict that there is no free lunch may be more
applicable to his own followers than to the supposedly spendthrift
social democrats against which he threw it in the 1960s. Ultimately,
public spending relies on tax revenue; another truism from neoliberal
textbooks. From Athens to Wall Street, the economic crisis eats its way
from private balance sheets into the households of the general public.
The fiscal crisis of the state becomes, on top of increasing pressure on
employment and wages, a conflict over the size and distribution of the
tax burden. Political responses to this conflict vary widely: from US tea baggers, who are violently anti-government because they
can't cope with their own dependence on government money, to Greek
workers on strike the day their government asked the IMF and EU partners
for help. These conflicts over public sector austerity and financial
bailouts are only likely to build, certainly in Europe, over the coming
year.